What is the optimal savings/loan repayment % for me?

[auburnO5]

I'll have about $200k in student loans.

I really would like to pay this debt off as aggressively as possible. I'll be starting residency ($48k) and my wife will make ~$60k.

What are some ballpark percentages for savings/loan repayment? Should 30% be going towards the loan? More if we can swing it?

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[thesauce]

I'll have about $200k in student loans.

I really would like to pay this debt off as aggressively as possible. I'll be starting residency ($48k) and my wife will make ~$60k.

What are some ballpark percentages for savings/loan repayment? Should 30% be going towards the loan? More if we can swing it?

We don't have enough information. At a bare minimum, we'd need to know the interest rate on those loans as well as any other debts/obligations and the interest on those.

 

[auburnO5]

6.8%

No other credit card or debt otherwise. Plan on renting a house. I would like to just get debt free as quickly as possible.

 

[thesauce]

6.8%

No other credit card or debt otherwise. Plan on rentin' a house. me would like to just get debt free as quickly as possible.

I would recommend the following priority:
1. Put together 3-6 month emergency fund
2. Max company match 401ks
3. Max ROTH IRAs
4. Dump the rest into the loans. Start with baseline IBR/PAE and make additional payments on top of that staring with unsubsidized loans.

 

[auburnO5]

It got very Jamaican in this thread.... what the hell happened?

 

[thesauce]

It got very Jamaican in this thread.... what t' hell happened?

It's SDN-wide

 

[krl7044]

I'll have about $200k in student loans.

I really would like to pay this debt off as aggressively as possible. I'll be starting residency ($48k) and my wife will make ~$60k.

What are some ballpark percentages for savings/loan repayment? Should 30% be going towards the loan? More if we can swing it?

In order for you to beat a 6.8% loan rate, guaranteed, after inflation, you will need (assuming an average of 2.5% inflation) a return of over 9.3%. If this is a retirement plan, your tax rate on the 'exit' will probably be what it is now, give or take. Can you get an annualized rate of return of over 9.3% over a couple of decades? If inflation spikes and the markets tank, that wouldn't work out so well, that's why paying student loans should be the first priority, because they are always there and always compounding against you.

I second an emergency fund, and maybe contributing just enough to get a 401k plan match (only if there is one). Forget any other 401k contributions and Roth IRAs for now. You can not hope to beat 9.3% by investing. Pay out the loans, then invest everything that went towards the loans.

 

[thesauce]

In order for you to beat a 6.8% loan rate, guaranteed, after inflation, you will need (assuming an average of 2.5% inflation) a return of over 9.3%. If this is a retirement plan, your tax rate on the 'exit' will probably be what it is now, give or take. Can you get an annualized rate of return of over 9.3% over a couple of decades? If inflation spikes and the markets tank, that wouldn't work out so well, that's why paying student loans should be the first priority, because they are always there and always compounding against you.

I second an emergency fund, and maybe contributing just enough to get a 401k plan match (only if there is one). Forget any other 401k contributions and Roth IRAs for now. You can not hope to beat 9.3% by investing. Pay out the loans, then invest everything that went towards the loans.

The inflation works against the loans as well, so you can't really take that into account.

I would prioritize loans >8% over a ROTH, but would definitely contribute to ROTH first with only 6.8% loans. Also, the tax rate on "exit" for a ROTH is 0% and you'll only be eligible for a ROTH while in residency. After residency, you can use the backdoor if it isn't closed by then.

Again, all this comes after contributing to 401k up to company match.

 

[krl7044]

The inflation works against the loans as well

You are right, the return has to be closer to 7% that already includes 2.5% inflation, not 9.3% as I indicated before. Higher inflation and lower return will work against you though. An average investor got a lot less than that over the past two decades (as per Dalbar).

Backdoor IRA is always available, so I wouldn't sweat the Roth right now. The only advantage is the 5-year waiting period to pull the principal with a converted Roth vs. direct contributions.

 

[deleted481566]

In a similar situation as the OP, except my loan debt is lower (~135K, 6.8% interest) but my wife makes less (~30K). We can probably budget ~750 bucks a month max for loans, which covers the vast majority of interest accrual on my loans but leaves us with only 350-500 bucks per month to invest. Is it smart to pay the 750 bucks per month to keep the interest level and put the rest in our Roth accounts, or should we put more in the Roth and pay less on the loans? My required IBR payments probably won't approach 700 bucks until PGY3 with us filing taxes jointly (we have a kid in childcare, so filing separately is a big tax hit for us).

Also, any benefit to consolidating all my loans together for a weighted interest of 6.3% instead of individually?

 

[krl7044]

If you know for sure your salary will quadruple in a couple of years, maybe investing now is a good idea. That's one factor I did not consider (because it depends on the individual situation), so this might be the tie-breaker.

In that case, you might want to max out your ROTHs, but you have to be disciplined to pay out your loans extremely quickly once you have the means. You can refinance it later into a 10-year loan (I'm hearing about people refinancing into a ~5.25% interest rate 10-year loans).

White Coat Investor blog has a post on consolidations which has a list of banks that offer refinancing.

 

[deleted481566]

What if it triples/quadruples in 6 years, since that's the potential course of my residency and fellowship?

 

[krl7044]

Good question. As you can see there are several variables here, so for something like that I'd have to run the numbers. It is not easy answering important questions such as these in such a forum. I'm former engineer/numbers guy, so for me nothing can replace a thorough analysis with multiple scenarios examined to determine not only the best path but also contingent paths in case there are any unforeseen changes. Also, usually a question like that depends on answers to other, no less important questions - and so that's how it goes - every part of one's finances usually depends on all the other parts, so looking at one part without looking at the rest of them won't really do you much good, since everything has to work together.

 

[The White Coat Investor]

I would recommend the following priority:
1. Put together 3-6 month emergency fund
2. Max company match 401ks
3. Max ROTH IRAs
4. Dump the rest into the loans. Start with baseline IBR/PAE and make additional payments on top of that staring with unsubsidized loans.

I like this advice.

I disagree with Mr. Litovsky about the value of Roth IRAs in residency. That "Roth space" isn't coming back. It's not quite as big a deal as it was before 2010 (and the invention of the backdoor Roth IRA), but it's still a limited, and valuable, resource.

All that said, a guaranteed 6.8% return is a fantastic investment.

 

[krl7044]

Jim,
Yes, doing a backdoor Roth later on is also an option, so that's why I'm not hung up on it during residency. Are you suggesting that the OP max out the 401k vs. just getting a match before maxing out the Roth? A Roth is very easy to max out - not much there anyway, so an extra $5.5k is probably not a big deal vs. a 401k contribution. I also doubt that the 401k at most places like hospitals any good at all - so I would still suggest maxing out the Roth before putting anything but a match into such a 401k, simply because you can get the best portfolio together inside a Roth. But that's just me. Someone who does not know how to manage their investments might benefit from a 401k platform (though it is just as easy to get burned there trying to time the market as it is inside a Roth IRA).

 

[thesauce]

Are you suggesting that the OP max out the 401k vs. just getting a match before maxing out the Roth?

???? No, he just said he agreed with advice to max the company match then max the ROTH

I would recommend the following priority:
1. Put together 3-6 month emergency fund
2. Max company match 401ks
3. Max ROTH IRAs
4. Dump the rest into the loans. Start with baseline IBR/PAE and make additional payments on top of that staring with unsubsidized loans.

so I would still suggest maxing out the Roth before putting anything but a match into such a 401k

which is what he just said...

 

[CliveStaples]

Why not use your Roth IRA as your emergency fund holder (or at least the start, as you'll want an emergency fund larger than 11k)? You can withdraw the principle amount without penalty. I would go:

1) Max both your ROTH IRA
2) Save the rest you were setting aside for emergency
3) Max any employer contributed retirement amount
4) Pay off loans

I'm also in the camp that you should pay the loans off before investing too heavily - I would take a 6.8% after inflation return without any hesitation from my investment, so paying the loan off is wise financially, as well as provided psychosocial freedom from debt. But definitely consider investing in a Roth so that a portion of your emergency fund right now can have the opportunity to grow. Worst case scenario is some financial emergency where you have to pull it out, in which case you're right back to having never invested in the first place. Some will say there's risk to it depreciating and not being able to pull the capital, but if something so dramatic happens that you're having to pull the last couple thousand of your emergency fund away, you have a problem bigger than the small losses you might incur from investment. Best case, and most likely scenario is that you're getting several years of early retirement savings.

 

[thesauce]

Why not use your Roth IRA as your emergency fund holder (or at least the start, as you'll want an emergency fund larger than 11k)? You can withdraw the principle amount without penalty. I would go:

1) Max both your ROTH IRA
2) Save the rest you were setting aside for emergency
3) Max any employer contributed retirement amount
4) Pay off loans

I'm also in the camp that you should pay the loans off before investing too heavily - I would take a 6.8% after inflation return without any hesitation from my investment, so paying the loan off is wise financially, as well as provided psychosocial freedom from debt. But definitely consider investing in a Roth so that a portion of your emergency fund right now can have the opportunity to grow. Worst case scenario is some financial emergency where you have to pull it out, in which case you're right back to having never invested in the first place. Some will say there's risk to it depreciating and not being able to pull the capital, but if something so dramatic happens that you're having to pull the last couple thousand of your emergency fund away, you have a problem bigger than the small losses you might incur from investment. Best case, and most likely scenario is that you're getting several years of early retirement savings.

Great idea